“How Can This End Well?”

What if the Fed Has Lost Control? [The Daily Reckoning] May 04, 2023 [WEBSITE]( | [UNSUBSCRIBE]( “How Can This End Well?” - “How can this end well?”… - The solution to the banking crisis is to cut rates — which the Fed says it won’t do… - Then Charles Hugh Smith shows you why the Fed may be losing control of the financial system… [Urgent Income Demo]( Jim Rickards calls him The Banker. He’s a financial anomaly. He doesn’t target 1,000%... 3,000%... or 5,000% gains. Instead, this former hedge fund manager is all about steady – and fast – income. And he’s among the absolute best in the world at that… [Click Here To Learn His Strategy]( Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, “Current situation: - Interest rates at their highest level since 2006 - Credit card debt set to cross $1 trillion for the first time - Multiple regional banks on brink of collapse - Regulators believe in “system is strong” - One month away from U.S. default How can this end well?” Here you have the reflections of economics crackerjack Adam Kobeissi — he of the eponymous Kobeissi Letter. Indeed: How can this end well? We are not half so convinced it can end well. Cling to the banking unpleasantness alone. As a group, the three banks that have collapsed since March — Silicon Valley Bank, Signature Bank and First Republic Bank — boasted greater assets than all 25 banks that died the death in 2008. The latter commanded $373 billion in assets in 2008. The former commanded $548 billion in 2023. Yet what about inflation? Do the two figures truly represent apple-to-apple, orange-to-orange, lemon-to-lemon comparisons? Even when adjusted for inflation the three recent collapsings exceed the 25 collapsings of 2008. The latter’s inflation-adjusted assets stood at $526 billion — substantially beneath $548 billion. Here we have not a wobble but a good hard shake… despite all official claims otherwise. Meantime, we are informed — by Gallup — that 48% of Americans harbor concern for the safety of their bank-housed money. That 48% figure exceeds the 45% of Americans fearing for their money in the wake of 2008’s Lehman Bros. bellying-up. Dominoes have been set in motion. Which will next go tumbling over? And when will the topplings end? The answers of course are on the knees of the gods. Yet we bet high the business is far from ended. The pseudonymous Tyler Durden of ZeroHedge: The only thing that can stop this crash is the Fed cutting rates... which, needless to say, would be reputational suicide for the what little credibility the Fed has left as it would be the fastest reversal following a rate hike in history… Just yesterday Mr. Powell disclaimed the possibility of pending cuts to the federal funds rate. He conceded the distinct possibility of a “pause.” Yet not of actual decreases. Who could possibly take the fellow sternly if he executed a sudden 180-degree turnabout? Very few take him sternly as is. The surrender would sink him. The foregoing of course suggests he is willing to watch additional dominoes go tumbling. He is also willing… perhaps he is even inwardly eager… to entertain recession. That is because he believes recession would help scotch the inflation bugaboo that hagrides him yet. Inflation, official inflation, that is — the phrase is necessary — runs at 5%. The fever has subsided from last June’s 9.1%, it is true. 5% inflation nonetheless represents a fever, a junior fever. The Federal Reserve’s conception of a homeostatic 98.6 degrees is 2% inflation. Until it is attained the central bank will administer to the patient in his sickbed. Recession would elevate the unemployment rate and depress the consumer spending rate. That is, recession would depress the inflationary fever. Yet what if the patient is in the hands of a quack physician whose witch-doctoring, potions and patent medicines have lost all curative power, all oomph? What if the Federal Reserve has lost all control of the economic and financial patients under its care? What if the Federal Reserve is powerless? Below, Charles Hugh Smith tackles the questions. Read on. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: The internet is filled with self-proclaimed financial “gurus.” Several of these individuals: - Do NOT show you their real trades… - Instead, they show you “back-tested,” cherry-picked examples… (Which is fine in some cases, but you don’t want to exclusively rely on this) - And they probably can’t even beat the S&P 500 during a horrific year… Well, my Jim Rickards’ colleague, who he’s calling [“The Banker,”]( is not one of these people. Last year his model portfolio (which includes [hundreds of his REAL trades]( grew by 190%. Yes, that return already accounts for his losing trades. And if you don’t believe this is possible…then he wants to prove it to you. [Watch this video to learn his time-tested income strategy.]( You’ll see hundreds of examples of The Banker’s REAL trades. He truly has nothing to hide… And you have so much to gain by learning his income strategy. BUT, you can’t afford to wait around. This blockbuster video is coming down at midnight tonight. That’s just a few hours from now. [Go here now to get started before the clock strikes midnight.]( [BREAKING: Elon Musk Bets Big On One Crypto.]( [Click Here For The Details]( The Daily Reckoning Presents: “What if the Fed has already lost control but nobody dares question the confidence in Fed omnipotence?”… ****************************** What if the Fed Has Lost Control? By Charles Hugh Smith [Charles Hugh Smith] CHARLES HUGH SMITH Scrape away the hand-wringing about interest rates and we find a bedrock of complacency. Nobody seems to doubt that the status quo can grind on for another 30 years doing the same stuff it's done for the past 30 years. The U.S. economy and its financial system operate under the implicit belief that the Federal Reserve controls the direction of the economy and finance. This belief isn't in Fed influence, it's in Fed control: The Fed can reverse a stock market decline on a dime, it can reverse a recession, it can do "whatever it takes" to keep markets stable and expansive. The history of the past 30 years seems to support this belief. Every time a financial crisis has manifested, the Fed has "saved the day" with some new policy extreme, changing the rules, jacking up its balance sheet 10-fold and so on. The assumption here is that nothing can bring down a system that can create as much money as it needs to solve any spot of bother and we have the past 30 years of history to prove it. Nobody seems to think there are any constraints on the Perpetual Motion Finance Machine. Few seem to ponder the possibility that the whole freaking shebang of debt and leverage might give way and tumble over the cliff regardless of what reforms (gold-backed currencies, etc.) and other financial modifications are instituted. In other words, few seem willing to entertain the possibility that the system is now beyond the point that a return to stability is possible. In systems terms, the whole shebang (the global financial system and the global economy it enables) has veered so far out of equilibrium that incremental policy tweaks can no longer restore equilibrium. The flaw in this confidence in Fed control is the three speculative bubbles that have inflated and burst in the era of Fed Control, 1995 to the present. These bubbles could not have inflated without a "dovish" Fed pushing interest rates down and juicing the financial system with liquidity/credit. Since all speculative bubbles eventually burst, the Fed is forced into "rescue mode," which requires ever more extreme manipulation, oops, I mean intervention, to stabilize the bubble bursting and inflate the next bubble. What few entertain as a possibility is the Fed is losing control of the economy and finance for systemic reasons that have nothing to do with Fed policy per se. In other words, it's not a "Fed policy error" that brings the system down, it's much larger forces: diminishing returns and second-order effects. The immediate effect of new Fed policy extremes is strong, much like a new drug has an immediate effect. But as the drug is injected again and again, it loses its efficacy. In medicine this is a biological process; in finance, it's a psychological process as participants habituate to every new Fed policy extreme and count on its 1) permanence and 2) continued efficacy. For example, the Fed's trick of lowering bond yields/interest rates. Participants can confidently increase their exposure to risk to insane levels and dispense with hedges because they're confident the Fed will drop interest rates back to zero if the stock market falters. [“The Mainstream Media Is Lying To You!”]( The media would have you believe that the worst of the supply chain issues are over. But the opposite is true… Behind the scenes, things are getting much, much worse. Bob Biesterfeld, CEO of one of the biggest logistics firms in the world, warns “the pressures on global supply chains have not eased, and we don’t expect them to any time soon.” This is going to impact every American’s life in a potentially major way… And I’m urging everyone I can to prepare now… [Click Here To Learn How]( This confidence in the efficacy of Fed policies can be understood as a buffer, providing resilience and a backstop ("the Fed Put") to any financial/economic instability. Participants stop panicking the moment the Fed announces a new dovish policy, even if the policy has limited effect on real-world conditions. The decline of real-world efficacy is masked by the instant euphoria of participants, who have come to count on the Fed's actions resolving crises literally overnight. The decay of diminishing returns occurs under the radar. Few understand all the Fed's actions (reverse repos, etc.) or the scale of these operations, or their efficacy in terms of correcting disequilibrium/instabilities in the real-world economy and markets. While participants continue to believe these buffers will always protect the system from hazard, the buffers have eroded. The next Fed "save" fails, revealing the buffers have collapsed. Put another way, the Fed has lost control. Every new Fed policy extreme generates second-order effects that unleash unintended consequences. The prime example is moral hazard, the belief that risk can be taken on to boost speculative gains without suffering any consequences of that risk blowing up. Since participants believe the Fed will slash interest rates back to zero as soon as markets swoon, they increase their gambles based on that confidence. Any debt taken on today can be rolled over into lower rates in the future, so there's no limit on risk or credit expansion. The riskiest possible expansions of credit — to fund stock buybacks, acquisitions of competitors, etc. — are greenlighted based on the confidence that the Fed will always push interest rates back toward zero as soon as conditions wobble. This confidence sets up a feedback loop in which Fed policies push participants to extremes of risk and debt that guarantee speculative bubbles inflate and then burst, demanding fresh Fed policy extremes. In other words, the Fed has created a doom loop in which the most insane risk is transformed into a "safe bet" based on the expectation of a Fed "save." But what if the Fed is unable to push policies to new extremes due to systemic constraints? What if policies that worked like magic before no longer work this time around due to diminishing returns/collapse of buffers? What if the Fed cannot reverse the doom loop of second-order effects its previous policy extremes have generated? These outcomes don't seem farfetched to anyone who studies systems dynamics. Rather, they seem inevitable and predictable. What if the Fed has already lost control but nobody dares question the confidence in Fed omnipotence? It's not the Fed policy extremes that work the magic, after all; it's the confidence of participants that resolves the bubble bursting crisis. Those who look at systems dynamics have solid reasons for seeing this third massive Everything Bubble as the last bubble. When this bubble bursts, there will be no fourth or fifth bubble, there will only be rubble. Regards, Charles Hugh Smith for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Ed. note: The internet is filled with self-proclaimed financial “gurus.” Several of these individuals: - Do NOT show you their real trades… - Instead, they show you “back-tested,” cherry-picked examples… (Which is fine in some cases, but you don’t want to exclusively rely on this) - And they probably can’t even beat the S&P 500 during a horrific year… Well, my Jim Rickards’ colleague, who he’s calling [“The Banker,”]( is not one of these people. Last year his model portfolio (which includes [hundreds of his REAL trades]( grew by 190%. Yes, that return already accounts for his losing trades. And if you don’t believe this is possible…then he wants to prove it to you. [Watch this video to learn his time-tested income strategy.]( You’ll see hundreds of examples of The Banker’s REAL trades. He truly has nothing to hide… And you have so much to gain by learning his income strategy. BUT, you can’t afford to wait around. This blockbuster video is coming down at midnight tonight. That’s just a few hours from now. [Go here now to get started before the clock strikes midnight.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Brian Maher] [Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. --------------------------------------------------------------- [Charles Hugh Smith] [Charles Hugh Smith]( is an American writer and blogger, and serves as the chief writer for the blog "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites, and his commentary is featured on a number of sites including Zerohedge.com, The American Conservative, and Peak Prosperity. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. 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